2017 (4) TMI 405 - AT - Income Tax

Appeal partially allowed: Obsolete stock provision & business promotion expenses remanded for fresh evidence

Gateway Terminals India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, 5 (1), Mumbai

Gateway Terminals India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, 5 (1), Mumbai - TMI Issues Involved:1. Addition of provision for slow moving/obsolete stock to book profit under Section 115JB of the Income-tax Act.2. Disallowance of Corporate Social Responsibility (CSR) expenses.3. Ad-hoc disallowance of 25% of business promotion expenses.Issue-wise Detailed Analysis:1. Addition of Provision for Slow Moving/Obsolete Stock to Book Profit under Section 115JB:The assessee added Rs. 1,51,33,620 as provision for obsolete stock in the original return but withdrew it in the revised return, claiming it as a business loss rather than a provision. The AO disallowed this, treating it as an unascertained liability. The CIT(A) upheld the AO’s decision, noting the lack of details provided by the assessee. The Tribunal remanded the issue back to the AO for de-novo adjudication, directing the assessee to provide detailed evidence to substantiate the claim that the provision is an ascertained liability and not merely a provision or unascertained liability.2. Disallowance of Corporate Social Responsibility (CSR) Expenses:The assessee claimed Rs. 15,87,014 as CSR expenses, arguing these were for providing medical facilities to villagers around its business premises, enhancing corporate image and benefiting employees. The AO disallowed these expenses, viewing them as donations not incurred wholly and exclusively for business purposes. The CIT(A) upheld this disallowance, finding no direct connection to the assessee’s business. The Tribunal agreed, citing the mandate of Section 37(1) that expenses must be incurred wholly and exclusively for business purposes, which the assessee failed to demonstrate.3. Ad-hoc Disallowance of 25% of Business Promotion Expenses:The AO disallowed 25% of the business promotion expenses totaling Rs. 35,24,722, treating them as capital in nature. The CIT(A) upheld this decision. The Tribunal partially allowed the appeal, recognizing Rs. 24,13,196 spent on an event in Bahrain as business expenses, as it involved key customers contributing significantly to the assessee’s turnover. The Tribunal also allowed Rs. 2,07,868 for corporate gifts as revenue expenses. However, it remanded the issues of board meeting expenses (Rs. 1,30,713) and air ticket expenses (Rs. 7,73,005) back to the AO for de-novo adjudication, directing the assessee to provide detailed evidence proving these expenses were incurred wholly and exclusively for business purposes.Conclusion:The appeal was partly allowed. The Tribunal remanded the issues of provision for obsolete stock and certain business promotion expenses back to the AO for fresh consideration, requiring the assessee to provide detailed evidence. The disallowance of CSR expenses was upheld, and some business promotion expenses were allowed as revenue expenses.